The accompanying notes are an integral part of the unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES; GOING CONCERN
Business, Operations and Organization
Esio Water & Beverage Development Corp. was incorporated in Nevada in June 1988 as Richard Barrie Fragrances, Inc. Over the years, the Company changed its name several times, most recently from Tempco, Inc. to Esio Water & Beverage Development Corp. Esio Water & Beverage Development Corp. and its wholly-owned subsidiaries Net Edge Devices, LLC, an Arizona Limited Liability Company, and iMetabolic Corp, (“IMET”) a Nevada Corporation are hereinafter collectively referred to as the “Company.”
On March 16, 2015, the Company issued to the IMET 16 shareholders of record an aggregate of 60,000,000 shares, or 76.2% of the Company’s common stock. Prior to the close of the reverse merger, IMET had 10,000,000 common shares outstanding immediately prior to the merger and net liabilities of $20,500. Prior to closing, the predecessor company had 18,566,636 shares outstanding and net assets of $89,615, of which $85,378 was cash and $4,237 was non-cash. As a result of the closing of this transaction, IMET is now a wholly owned subsidiary of the Company and its business and operations represent those of the Company
For accounting purposes, this transaction is being accounted for as a reverse merger and has been treated as a recapitalization of the Company with IMET considered the accounting acquirer, and the financial statements of the accounting acquirer become the financial statements of the registrant. This transaction is hereinafter referred to as the “Reverse Merger.” The Company did not recognize goodwill or any intangible assets in connection with the transaction. The 60,000,000 common shares issued to the shareholders of IMET in conjunction with the share exchange transaction have been presented as outstanding for all periods.
On December 30, 2015, the Company filed Articles of Merger (the “Merger”) with the Nevada Secretary of State. The Merger was between the Company and our wholly-owned subsidiary, UPD Holding Corp. (the “Subsidiary”). Pursuant to Nevada corporate law, we amended our Articles of Incorporation by the Merger to change our name to UPD Holding Corp. We believe our new name more properly indicates our current lines of business because the Company has not been in the water and beverage industry since 2012. “UPD” stands for United Product Development.
Beneficial Conversion Feature
The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.
Going Concern
The Company’s unaudited interim consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern, has recurring net losses and net capital deficiency. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The September 30, 2017 financial statements do not include any adjustments that might be necessary if UPD Holding Corp. is unable to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (i) obtaining capital from management and significant stockholders sufficient to meet its minimal operating expenses; (ii) obtaining funding from outside sources through the sale of its debt and/or equity securities; and (iii) completing a merger with or acquisition of an existing operating company. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
Unaudited Interim Financial Statements
The accompanying unaudited interim consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission, and are unaudited. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented have been made. The results for the three month period ended September 30, 2017, may not be indicative of the results for the entire year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 filed with the Securities and Exchange Commission on October 13, 2017.
The preparation of the Company’s unaudited interim consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.
NOTE 2 – RELATED PARTY TRANSACTIONS
For the three months ended September 30, 2017, the President has provided the Company rent at no charge. We believe that the offices are adequate to meet our current operational requirements. We do not own any real property.
On September 1, 2016, through unanimous approval by its Board, the Company opened an escrow to initiate a proposed funding arrangement for future capital demands. The related party portion of this escrow consists of a $15,000 convertible Note held by the Company’s President which matured March 1, 2017. As a result of this date expiring, the President extended the maturity of the note to April 1, 2018. The company analyzed the extension under ASC 470-50 and concluded that this modification was not considered to be substantial. If not repaid by maturity, the note is convertible into 1,
875
,000 common shares at $0.0125 per share. If share conversion is not elected, then interest will be due in the amount of $15,000.
As of September 30, 2017, we owed Mr. Conte $10,875 in administrative expenses paid on our behalf. The amount is recorded in accounts payable and is due upon demand and non-interest bearing.
The Company analyzed the conversion option in the notes for derivative accounting treatment under ASC Topic 815,
“Derivatives and Hedging”
and determined that the instrument does not qualify for derivative accounting.
The Company therefore performed an analysis to determine if the conversion option was subject to a beneficial conversion feature and determined that the instrument does have a beneficial conversion feature equivalent. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.
NOTE 3 – STOCKHOLDERS’ EQUITY
Authorized Shares
At September 30, 2017, our authorized capital stock consists of 200,000,000 shares of Common Stock, par value of $.005, and 10,000,000 shares of Preferred Stock, par value $.01. The Company’s Board of Directors has the authority to divide the preferred stock shares into series and to fix the voting powers, designation, preference, and relative participating, option or other special rights, and the qualifications, limitations, or restrictions of the shares of any series so established.
Common Stock
At September 30, 2017 and June 30, 2017, there were 81,266,636 and 79,766,636 shares of Common Stock issued and outstanding, respectively.
At September 30, 2017, we had a total of 2,466,358 shares reserved for issuance pursuant to the 1,200,000 outstanding options and 1,266,358 outstanding warrants issued by the predecessor company. See
“Options and Warrants”
below for additional information.
On September 22, 2017, the Company entered into a consulting agreement with Sage Intergroup, Inc. for services related to investor relations. As part of this agreement, the Company issues 1.5M shares of the Issuer’s common stock, $0.005 par value. The value of the shares is $37,500 which is amortized over the 12-month term of the agreement. The Company accounted for $833 in stock based compensation and the unamortized stock compensation expense as of September 30, 2017 is $36,667.
Preferred Stock
The Company has not issued any shares of preferred stock as of September 30, 2017.
Options and Warrants
The Company did not issue any options or warrants during the nine months ended September 30, 2017.
As of March 16, 2015, the effective date of the Reverse Merger, the Company had 3,522,767 options outstanding pursuant to the predecessor company’s 1999 Equity Compensation Plan, of which 2,322,767 options have expired, leaving 1,200,000 options outstanding as of September 30, 2017.
In addition, as of the effective date of the Reverse Merger, the Company had 8,155,478 warrants outstanding issued by the predecessor company. Since the Reverse Merger, 6,889,
39
0 have expired and 1,266,358 remain. This remaining balance expires in late 2017 and early 2018.
Additional information about the predecessor company’s options and warrants and expense calculations can be found in that company’s financial statements contained in its Annual Report on Form 10-K filed with the SEC on October 14, 2014 and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 filed with the Securities and Exchange Commission on October 13, 2017.
NOTE 4 – NOTE RECEIVABLE
On September 21, 2017, the Company loaned Record Street Brewing, a Company of which UPD’s CEO is a minority shareholder, $15,000 on a note due October 6, 2018. The interest through and including the Maturity Date shall accrue at a simple interest rate equal to the Applicable Federal Rate as published by the Internal Revenue Service in respect to the month during which the loan was made, calculated on the basis of a 365-day year and actual days elapsed. The Company considered variable interest entity accounting and concluded that it does not apply.
NOTE
5
– CONVERTIBLE NOTE
On September 1, 2016, through unanimous approval by its Board, the Company opened an escrow to initiate a proposed funding arrangement for future capital demands. A single private placement provided $50,000 of this escrow in the form of a convertible note. This convertible note matured on March 1, 2017. As a result of this date expiring, the single private placement has executed an extension taking the mature date out to April 1, 2018. If not repaid by maturity, the note is convertible into 4,000,000 common shares at $0.0125 per share. If share conversion is not elected, then interest will be due at the face value of the original note of $50,000.
The Company analyzed the conversion option in the notes for derivative accounting treatment under ASC Topic 815,
“Derivatives and Hedging”
and determined that the instrument does not qualify for derivative accounting.
The Company therefore performed an analysis to determine if the conversion option was subject to a beneficial conversion feature and determined that the instrument does have a beneficial conversion feature equivalent. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.
NOTE
6
– NOTE PAYABLE
On September 15, 2017, the Company entered into a Promissory Note. A single private placement provided $100,000 for funding of future projects and expenses. This note matures on September 15, 2018 with accrued interest equal to 12% per annum, calculated on the basis of a 365-day year and actual days elapsed, and thus is due and owing on the Maturity Date.
NOTE 7 – SUBSEQUENT EVENTS
On November 3, 2017, the Company entered a Convertible Promissory Note with an investor for the principal sum of $10,000. The effective interest rate is 12%, with a maturity date of October 31, 2018, at a conversion share price at $0.10 per share with an effective conversion to 112,500 shares.
On November 1, 2017, the Company entered a Convertible Promissory Note with an investor for the principal sum of $75,000. The effective interest rate is 15%, with a maturity date of October 31, 2018, at a conversion share price of $0.10 per share with an effective conversion to 862,500 shares.
On October 10, 2017, the Company entered into a Stock Purchase Agreement with an investor for the principal sum of $10,000 at a share price of $0.10 resulting in 100,000 shares.
Per Note 4 above, on September 21, 2017, The Company loaned Record Street Brewing $15,000 on a note due October 6, 2018. Subsequently, an additional $5,000 was loaned on October 4; $10,000 on October 17; and $5,495 on October 23. All three of these additional payments were added to the note due October 6, 2018, under the same terms discussed in Note 4. An additional $35,000 was loaned on November 7, 2017 and will be held under similar terms with a Maturity Date of November 6, 2018.
